An economic disaster in the making: how Europe is losing its energy efficiency lead

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Photo: Knauf Insulation

Photo: Knauf Insulation

A European building retrofit programme could reduce Russian gas imports by 80%. A 40% energy saving target could  remove the need for Russian gas altogether. Yet the EU currently seems unwilling to impose the measures necessary to step up energy saving. As a result, European industry is rapidly losing its international lead in efficiency, which is crucial to its international competitiveness. What is more, European companies active in energy efficiency are increasingly taking their wares – and innovations – to Asia. Rebecca Lawson of E3G raises the alarm.

With the EU’s Energy Efficiency Directive up for review this summer, there is a heated battle going on in Europe about what measures to take to improve energy efficiency. The focus of the fight is whether the EU should adopt an energy efficiency target for 2030, and how high it should be.

Just recently, on 17 June, Ministers from seven EU countries, including Germany, called on the European Commission to adopt an ambitious binding energy efficiency target for 2030. However, at this moment the Commission, for various reasons, seems not prepared to go any further than recommending a weak non-binding  target of 27%, a very small increase on the 20% target that the EU has in place for 2020.

Twenty-five US States have fully-funded policies in place that establish specific energy savings targets that utilities must meet through customer energy efficiency programs

This approach carries serious economic risks, as we shall argue in this article. It also repeats the mistakes of the past. The existing 20% target is the only target among the EU’s famous 20-20-20 climate and energy targets (emision reduction, share of renewable energy and improvement of energy efficiency by 2020) which is not binding. And the only one that the EU is currently expected to miss, thereby wasting an amount of energy that exceeds  the annual energy consumption of Austria. Not surprising when you consider that only 3 out of 28 Member States currently have credible National Efficiency Plans in place.

Thus, although policymakers regularly sing the praises of energy efficiency, they seem unwilling to adopt the measures necessary to put their beliefs in practice. The reason presumably is that they believe that in  a climate of rising energy prices, energy efficiency will be delivered by the market with minimal need for regulatory intervention. This is a misconception –experience has shown that government regulations and mandatory standards are needed to allow the market to deliver the benefits of energy efficiency. A guiding rather than an invisible hand is required to overcome the multiple and systemic market barriers that stand in the way of an efficient Europe.

Supply side fixes

What is at stake? A lot.

The EU has an enormous as yet untapped energy saving potential –up to 41% final energy savings could be realised by 2030 with investment costs offset by €1-2 trillion of savings between 2020-2030[1].

The recent crisis in Ukraine has demonstrated, from an energy security perspective, how high the stakes are if this is not achieved.  Europe is the world’s biggest energy importer with an annual import bill of €500 billion and rising.  Russian gas imports alone currently cost the EU €60 million every day. The countries most reliant on those gas supplies are also among the most energy inefficient in Europe.

The IEA predictes that North America will halve its growth in energy demand to 2035 and the energy intensity of the US economy will decline by 40%.  EU energy demand is forecast to be just 7% lower by 2035

Yet the Commission’s draft energy security strategy, published at the end of May, focuses on supply side fixes to gas dependence which do nothing to maximise the synergies between energy security, competitiveness and sustainability objectives.

Focusing EU funds on deploying targeted efficiency measures could make significant inroads on gas dependency quickly and cost effectively, especially when compared to supply solutions such as the development of shale gas reserves.  For example:

  • An EU-wide building retrofit programme could cut gas use by an amount equal to about 80% of Russian imports.
  • Development of EU demand side electricity markets could cut gas use in the power sector equivalent to 75% of Russian imports.
  • Enhanced action to improve industrial efficiency could cut gas use by an amount equal to 15% of Russian imports.

A binding energy efficiency target equal to energy savings of 500 Mtoe by 2030 (equivalent to 40% of final projected energy in 2030) combined with a new suite of measures to unlock demand, could remove dependency on Russian gas imports entirely in the next decade[2].

Closing the efficiency gap

Energy efficiency plays an equally crucial role in securing the EU’s industrial competitiveness. The EU has performed impressively in the past. It has succeeded in decoupling its GDP growth from its energy consumption and its economy is, as a result, 25% less energy intensive than that of the US.

This achievement means that EU energy-intensive goods still dominate global export markets despite the widening disparities in energy prices between the EU and global competitors since 2008.  The headline message is that while European energy prices are going up, industry is doing very well at reducing energy waste and in doing so managing costs.

Energy efficient LED lighting has dropped to just 2% of its 2001 price level yet market penetration of the total lighting market in Europe is trailing Asia by 15-17%

The other side of the coin is that, if it is to maintain this lead, the EU cannot afford to lets its focus on efficiency slip, particularly as evidence is emerging to suggest that the US, and the EU’s other major competitors such as China, are increasingly focused on closing the efficiency gap.

For example, President Obama recently announced a suite of strong new efficiency measures including two major new energy saving appliance/equipment standards projected to generate more than $26 billion in savings[3].   Action at State level is also intensifying in the US.  As of April 2014, twenty-five US States had fully-funded policies in place that establish specific energy savings targets that utilities or non-utility program administrators must meet through customer energy efficiency programs. The strongest requirements exist in Massachusetts, Rhode Island, and Vermont, which require almost 2.5% savings annually. Higher, it is worth noting, than the 1.5% annual improvement required by the EU’s Energy Efficiency Directive.

The International Energy Agency (IEA) has predicted that, as a result of such policies, by 2035, North America will halve its annual growth in energy demand to 2035 compared with a current policies scenario and the energy intensity of the US economy will decline by about 40%.  In comparison, European energy demand is forecast to be just 7% lower by 2035 and that depends upon full implementation of the Energy Efficiency Directive which, as highlighted above, the EU is not on track to achieve.

European efficiency investment flowing out of Europe

This trend, combined with European policy uncertainty on efficiency, means that European companies who design and sell technologies that enable other European companies and households to manage the impact of rising energy prices are seeing their markets grow fastest outside of Europe and are planning future investment accordingly. For example:

  • Schneider Electric’s energy management tools are cutting the energy use of Chinese cement companies – a sector which is overtaking the EU’s in terms of competitiveness.
  • German insulation company Knauf is focusing on increasing production capacity in the US, Turkey and Singapore rather than in the EU.
  • British software company 1E has developed software to switch off unused PCs saving clients over $800m but 80% of its sales are outside of the EU.
  • Energy efficient LED lighting has dropped to just 2% of its 2001 price level yet market penetration of the total lighting market in Europe is trailing Asia by 15-17%.
  • Danfoss, a Danish heating solutions company makes technologies that can increase the operating efficiency of power plants by 30%, is reporting most of its growth as coming from China not the EU.

To reverse these negative investment trends, it is imperative that the Commission recommends an ambitious but achievable binding long term efficiency target of 40% final energy savings by 2030.

But that alone will not be enough. This target must be accompanied by a set of reforms to unlock these energy savings by systematically removing the market, economic, institutional and financial barriers to an efficient Europe.

Car manufacturers have met the 2015 target 2 years ahead of schedule. This will save more CO2 than the first two phases of the EU Emission Trading Scheme. Far from damaging the car industry, these standards are now becoming the global norm 

In formulating those reforms, the Commission should consider what measures have been the most effective in delivering efficiency to date.  In this regard, there is one stand-out success story – the CO2 in Cars Regulation[4].  Introduced in 2009, after a decade of voluntary commitments from the car industry failed to deliver any substantive improvements in fuel efficiency and CO2 emissions, the mandatory standards backed by fines for non-compliance saw the rate of emission reduction triple. Car manufacturers have met the 2015 fleet wide target two years ahead of schedule, an achievement that will save more CO2 than the first two phases of the EU ETS, Europe’s flagship emission reduction measure. Hitting the target set for 2020 will save European drivers €500 a year.

What is more, far from damaging the European car industry, these standards are now becoming the global norm. This should serve as a reminder of the benefits of European level cooperation at a time when the political tide is moving against it.

Using a Regulation rather than a Directive to introduce the minimum emission standards meant there were no delays or differences in implementation across Member States and a consistent level of penalties applied.  This must be contrasted with the Eco-Design, Energy Performance and Energy Efficiency Directives, all of which faced long delays in implementation from a large number of Member States with the Commission slow to bring infringement proceedings. The Eco-Design Directive has, in particular, been undermined by a lack of effective and consistent penalties and enforcement across Member States.

Bridesmaid

So what should be done?

There are a number of concrete actions that  Europe can take to stay ahead in the energy efficiency race, in addition to adopting a binding 2030 target. For example:

  • Stronger implementation of the Energy Efficiency Directive supported by the establishment of National Delivery Authorities to drive delivery of committments in National Efficiency Plans.
  • Increasee building renovation rates.
  • Introduce market reforms to create a single market for energy efficiency products and services driving efficient investment across the EU by helping to achieve economies of scale.
  • Expand pipelines of finance – using EU structural funding to quickly deploy energy efficiency measures in countries with worst efficiency performance who are  most dependent on Russian gas.
  • Remove current barriers to Member States providing financial support to energy efficiency projects imposed by the State Aid regime. Greater use of mandatory efficiency standards – the success of CO2 in Cars Regulation shows how successful this approach can be.
  • Create a culture of energy saving – consider replicating Danish and UK measures where taxes/trading schemes have been used to drive improvements in energy efficiency in commercial organisations.
  • Create an EU industrial policy  focused on making European companies the most energy efficient in the world. The scope of exemptions in the ETS (Emission Trading Scheme) must  be limited to avoid negative impacts of higher costs on other more productive sectors[5]. Exemptions from carbon price signals should be more targeted and firmly tied to binding requirements to improve efficiency.

If energy efficiency remains the bridesmaid of EU climate and energy policy, the consequences will be grave. It will cost the EU over €37 billion every year by 2020 and in the longer term leave  EU citizens and businesses dangerously vulnerable to fossil fuel prices that are projected to double by 2030 – and to fossil fuel exporters who will ruthlessly exploit their advantage.

In addition, European industry will lose the competitive edge it desperately needs to compete in a global marketplace in which it is not favoured by low energy prices and ample energy sources. The case for EU level mandatory action to make our companies, homes, cars and products the most efficient in the world could not be clearer.

Editor’s Note

Rebecca Lawson is a policy advisor at E3G (@EthreeG), an independent, non-profit organisation operating in the public interest to accelerate the global transition to sustainable development.  E3G is a member of both the Coalition for Energy Savings and European Alliance for Energy Savings.

Footnotes

[1] BMU and Fraunhofer ISI (2012) Contribution of energy efficiency measures to climate protection within the EU until 2050. See http://www.isi.fraunhofer.de/isi-media/docs/e/de/publikationen/BMU_Policy_Paper_20121022.pdf  and Ecofys ‘Saving Energy: Bringing down Europe’s energy prices to 2020 and beyond’ (November 2013) http://www.ecofys.com/files/files/foe-ecofys-2013-saving-energy-2020-and-beyond.pdf

[2] http://www.stefanscheuer.eu/20140321_Stefan_Scheuer_Gas_Savings_Imports.pdf

[3] http://www.whitehouse.gov/the-press-office/2014/05/09/fact-sheet-president-obama-announces-commitments-and-executive-actions-a

[4] Regulation 443/2009

[5]http://www.bruegel.org/nc/blog/detail/article/1235-what-should-europe-do-about-high-energy-prices/

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